6 LOAN MISTAKES TO AVOID

There is nothing wrong with making a mistake. However, it becomes a problem if you keep committing the same missteps over and over again. Learning from these common borrowing mistakes can prevent headaches and show a better way to borrow

1 TREATING ALL LOANS AS THE SAME

The only common thing with all loans is the repayment—the EMI. The rules for loans vary depending on the loan you take. Home loan, car loan, student loan, personal loan and credit card outstanding are the common types of loan you take. Loans could be for asset-building such as when you borrow for a house to live in or to fund an education tat will get you a job. The interest rate on loans varies depending on the type of loan—secured or unsecured. Make sure you understand the loan you are taking and how it works and impacts your repayment.

2 BORROWING BEYOND WHAT YOU CAN REPAY

It is easy to overstretch your finances when there are so many conflicting demands—car, home, vacations, phone upgrade and so on. With loan easily available, it is easy to get into the trap to borrow money for everything, from essentials to nonessentials. Have a household budget; know where the money is coming from and where it is going. Control your expenses; cut down on non-essentials and learn to live within your means. Also, have control over how much money you pay towards servicing loans out of your income.

3 IGNORING HIDDEN COSTS AND FEES

One of the biggest financial mistakes people make is not keeping on top of the small stuff. You end up paying thousands of rupees in fees or penalties that could have easily been avoided. One of the most common mistakes is to delay the payment on your credit card. You borrow against an asset to repay another loan. Whenever you borrow, read the fine print. Know the terms and conditions, especially the one on late fee, charges and penalties. Set a reminder to make sure you do not delay a loan EMI or credit card payment. Do check the pre-penalty clause on loans so that you don’t end up paying more for closing the loan early.

4 NOT SHOPPING AROUND

Never be in haste to borrow money from any financial institution without doing ample research. Given the plethora of digital apps and resources to compare loans and check for the best rates and terms, you should spend time before you take any loan. Do not borrow because of convenience; borrow based on the best deal you get. It is easy to convert your credit card outstanding into EMIs, but it may be cheaper to transfer the outstanding to a new card.

5 IGNORING YOUR CREDIT SCORE

A good credit score can help you save a lot of money in interest rates. The better your credit score, the easier it is to get higher loan amounts, and even a better rate of interest, for things like buying a house. Make sure to check your credit score once a year and correct any errors in your report. Do not ignore old unsettled loans, even if they seem small sums.

6 PAYING LESS

It may seem a smart move to pay the minimum credit card outstanding or less than the actual EMI you need to pay on a loan. This not only impact your credit score, it also costs you more in the long run. By only paying the minimum amount due on your credit card, you increase the interest component on your loan dramatically. By paying less than what is due, you betray an inability to repay, which the borrower could use against you to claim the collateral against which you borrowed. Plan a clear timeline to retire your debts and work towards paying it all earlier.